Political Connections and Government Subsidies: Evidence from Financially Distressed Firms in China

Qizhi Tao, Yicheng Sun, Yingjun Zhu and Xiaolin Yang

Emerging Markets Finance and Trade, 2017, vol. 53, issue 8, 1854-1868

Abstract: Previous studies report mixed evidence regarding the effect of political connections on firm value. We seek new evidence in China, an important emerging market with a hallmark of a relationship-based economy. Using financially distressed firms (special treatment or ST firms) as a unique sample, we identify a direct channel through which political connections enhance firm value by showing that politically connected firms receive more government subsidies. Moreover, such effect becomes stronger for state-owned enterprises (SOEs), for firms with a better chance of survival, and after the government implemented a new policy to more strictly enforce the delisting in 2012.

Date: 2017
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DOI: 10.1080/1540496X.2017.1332592

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